Meet The Blogger Who May Have Just Saved The American Economy

The Fed's announcement of QE Unlimited was a clear departure from
past strategy: Rather than seeing asset purchases as an amount of
money injected into the financial system, the Fed is now
aggressively using the power of future guidance.

It's a step in the direction of Nominal GDP targeting, the hot
idea endorsed recently by Michael Woodford at the Jackson Hole
conference.

But while Woodford is one of the most respected monetary
academics in the world, the economist who deserves the most
credit for taking a wonky idea and making it mainstream is
Bentley economics Professor Scott Sumner who writes the blog
The Money
Illusion.

I haven’t seen anyone else say it yet, so I will. The Fed’s
policy move today might not have happened — probably would not
have happened — if not for the heroic blogging efforts of Scott
Sumner. Numerous other bloggers, including the market
monetarists and some Keynesians and neo Keynesians have been
important too, plus Michael Woodford and some others, but Scott
is really the guy who got the ball rolling and persuaded us all
that there is something here and wouldn’t let us forget about it.

Professors at Bentley University who've never published a famous
book don't normally shift the public debate. But Sumner's
vigorous and relentless blogging throughout the crisis on the
potential of expectations-focused monetary policy really broke
through. It all began with some links from Tyler Cowen and
perhaps a tiff with Paul Krugman. I became a regular reader and his
ideas have done a lot to influence me, and you can clearly see
the influence on Ryan Avent at the Economist, Matt O'Brien at the
Atlantic, Ramesh Ponnuru at National Review, Josh Barro at
Bloomberg, and a few of the Wonkblog
contributors. Outside the exciting world of online economics
punditry, NGDP targeting hasn't (yet!) caught fire as rapidly but
it gained explicit allegiance from Christina Romer, Krugman, the economics
team at Goldman Sachs, and eventually Chicago Federal
Reserve President Charles Evans who started out with a different
but similar-in-spirit program.

That really is the key here: Not only has he been incredibly
influential, but he really has done it almost entirely through
his blog. Also, the bi-partisan swath of his adherents is
remarkably rare for an economic pundit.

It's also rare for ideas to simultaneously gain currency among
academics and Wall Street economists like Goldman's Jan Hatzius,
who endorsed the idea about a year ago in a much buzzed-about
note.

The jury, obviously, is still out on the Fed's actions, but the
folks we like to listen to, like
Bill McBride at Calculated Risk, are very hopeful that this
can accelerate the economy.

And if it does, then Sumner's blogging and promotion of the idea
that the Fed should signal its unwillingness to let off the gas
pedal, until the economy has more than recovered, will deserve
major credit. Bloggers have accomplished some remarkable things,
and this one will be one of the biggest.

It is not about being smart, it’s about setting specific
goals and promising to do whatever one can to meet those
goals.

I’d like to see the Fed set an explicit target path for
nominal GDP. But at this point even a price level
or inflation target would be better than nothing.

Do “level targeting,” which means you commit to
a specified path for NGDP or prices, and commit to make up for
any deviations from the target path. Thus if you target
NGDP to grow at 5% a year, and it grows 4% one year, you shoot
for 6% the next.

Let market expectations guide Fed policy.
Ideally this would involve the sort of NGDP futures targeting
regime that I have proposed in this blog. Right now they
could focus on the yield spread between
inflation-indexed and conventional bonds. The spread is
currently than 1/2% on two year bonds, which means inflation
expectations are far too low for a vigorous recovery. It
should be closer to 2%.

The Fed should stop paying interest on excess
reserves, and if necessary should put a small
interest penalty on excess reserves. This
would encourage banks to stop sitting on all the money that has
been injected into the system.

If they did these things it would be easy to get inflation
expectations up to 2%. But if I am wrong, they should do
aggressive quantitative easing (QE), something
they have not yet done (despite misleading news reports to the
contrary.) They should buy Treasury bills and notes, with
Treasury bonds and agency debt available as a backup.